RBI permits corporations to work as rural agents of banks

According to the guidelines, BCs will raise deposits; disburse tiny loans; recover bad loans; sell micro insurance, mutual funds, pension products and other third-party products; and receive and deliver small value remittances

New Delhi/Mumbai: The Reserve Bank of India (RBI) on Tuesday allowed firms to play the role of an intermediary to spread banking in rural areas, in a move aimed at making banking services available to the unbanked.

RBI, in its guidelines for business correspondents (BCs), allowed individuals, non-governmental organizations, cooperative societies, post offices and companies with “large and widespread retail outlets” to become BCs, but kept non-banking financial companies (NBFCs) out of it.

One reason behind the move, according to people familiar with how NBFCs work, could be that these firms, including microfinance institutions, lend money in rural India. If they are allowed to mobilize deposits on behalf of banks and at the same time continue with their business of lending money, there could be a conflict of interest.

Telecom companies, fertilizers and oil marketing companies, and fast moving consumer goods makers with exposure to rural markets are likely to take the plunge following RBI’s move.

According to the guidelines, BCs will raise deposits; disburse tiny loans; recover bad loans; sell micro insurance, mutual funds, pension products and other third-party products; and receive and deliver small value remittances.

Their activities will be “within the normal course of banking business”, but conducted at places other than the bank premises and automated teller machines.

The distance between the BC and the base bank branch should not exceed 30km in rural, semi urban and urban areas, and 5km in metropolitan areas, RBI said.

RBI’s guidelines did not specify the fee structure, but noted the banks may pay “reasonable commission, which may be reviewed periodically”.

“Commission structure, or incentive mechanism, should be devised in a manner that mere increase in the number of clients served or the transaction volume does not drive the commission,” it said, adding that the remuneration should combine fixed and variable parts.

Experts familiar with BC activities are not very excited about the model as yet.

Bindu Ananth, president of IFMR Trust, a non-profit organization promoted by ICICI Bank Ltd, said the big challenge for BCs in India is to find a product mix that makes business sense.

“I think it will move the needle only if NBFCs and people who specialize in this business are allowed. Manufacturing companies have long stopped taking public deposits and will continue to concentrate on their core business,” said D. Muthukumaran, head (group corporate finance) at Aditya Birla Management Corp. Pvt. Ltd.

Abhishek Sinha, chief executive officer (CEO) of Eko India Financial Services Pvt. Ltd, a BC for the country’s top two banks—State Bank of India and ICICI Bank—said this move will bring in investments and expand scale of operations of BCs.

Currently, about 36,000 BCs are being employed by banks, besides less than a dozen institutions such Eko India and Financial Inclusion Network and Operations Ltd (Fino). Banks manage the individual BCs on their own. Once corporations are allowed to enter this space, they will be able to organize them better and take care of the security aspects as the job involves collection and disbursement of money.

The banks will, however, continue to be “fully responsible for the actions of the BCs and their retail outlets/sub agents”, the RBI guidelines said.

Access Development Services, a not-for profit organization that provides technical assistance to microfinance firms, had some time back carried a survey on viability of BCs and found them struggling.

“It was because of high operating costs,” Vipin Sharma, CEO of Access, said.

“Banks also need to look at ways to make the whole BC model more viable. The recent move to free up lending rates for small ticket sizes can serve as a catalyst to make the BC model more viable by allowing correspondents to cover costs,” he added.

About 50% of India’s population does not have bank accounts. In rural India, the coverage among the adult population is 39% against 60% in urban India. This doesn’t necessarily mean that 60 out of every 100 Indian adults in cities have bank accounts as many people operate multiple accounts.

Only 5.2% of the country’s 650,000 villages have bank branches even though 39.7% of the overall branch network of Indian banks, or 31,727, are in rural India.

Only 34% of people with annual earnings less than Rs. 50,000 in urban India had a bank account in 2007. The comparative figure in rural India is even lower, 26.8%.

To handle this, banks have been aggressively opening “no-frill accounts”, that require very low or zero minimum balance.

However, a 2009 study by Skoch Development Foundation, a strategy and management consultancy, says only 11% of 25.1 million such basic banking accounts, opened between April 2007 and May 2009, are operational.